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The small Mediterranean island of Cyprus has plunged the euro zone back into crisis with its faltering attempts to secure a bailout to plug a 16 billion euro ($20.72 billion) shortfall at its banks.

Among a series of dramatic twists and turns that included outrage over the willingness of European Union officials to plunder savings accounts by taxing the deposits in them, the biggest surprise was European markets' muted reaction to the Cypriot parliament's rejection of that plan.

The bailout terms, announced over the March 16-17 weekend, led to predictions that there would be carnage on European financial markets last Monday.

It didn't happen.

After initial slumps, the euro, European equities, and euro-zone sovereign bonds soon trimmed most of their losses as the region's markets recovered the remarkable calm they have enjoyed since the beginning of the year.

Two of the euro zone's weakest economies, Spain and bailed-out Portugal, raised billions of euros worth of debt at auctions last week without having to stump up higher yields. A Spanish auction on Thursday generated massive demand for that nation's 10-year benchmark bond. That would have been unthinkable at the height of the euro-zone debt crisis last summer, when demand for Spanish long-term debt virtually collapsed.

Most remarkable of all is that investors remained level-headed, even as the Cypriot crisis staggered from bad to worse. Following its parliament's overwhelming rejection of the bailout terms, the country has been scrambling to put together a plan B. It needs to find €5.8 billion on its own to unlock the €10 billion worth of aid being offered by the European Union and the International Monetary Fund. It has only days to do that. Its banks were closed all of last week, and Cyprus must ensure that deposits don't fly out the door once the institutions reopen. Failure to do so could bankrupt the island economy and make it the first country to leave the euro.

The European Central Bank effectively imposed a deadline on Cyprus when it said on Thursday that emergency liquidity would be extended to the banks beyond Monday only if the country finds a way to plug the capital shortfall.

On Friday, Cypriot leaders were still struggling to come up with a solution. Several ideas were being floated to avoid hitting the island's small savers, such as monetizing the country's pension and real-estate assets. Politicians are also seeking financial assistance from Russia, home to many of the depositors targeted by the one-off bank levy.

Credit Suisse analyst Alexander Redman reckons that the bulk of Cyprus' €32 billion of non-EU-resident deposits comes from Russia. Cypriot Finance Minister Michalis Sarris said on Thursday that Russia could invest in the country's natural-gas and bank assets in exchange for providing financial help.

Earlier in the week, analysts slammed the plan to tax small savers' bank deposits—effectively seizing a portion of each account—fearing that even if that idea were dropped, it could lead to a bank run in any struggling euro-zone economy.

David R. Kotok, chairman and chief investment officer with U.S.-based Cumberland Advisors, described the plan as "an unprecedented attack on bank depositors, banks, central banks, and the banking system of the entire euro zone."

So far, there's no evidence of euro-zone depositors pulling cash out of banks, despite the unfolding events in Cyprus. It seems that investors still believe ECB President Mario Draghi's promise to do whatever it takes to preserve the euro, a pledge that helped bring investors back to countries such as Spain and Italy in recent months, staving off the contagion fears that had hobbled the euro zone in the second half of 2012.

Julian Adams, chief investment officer of U.K.-based hedge-fund manager Adelante Asset Management, said that despite the magnitude of the Cyprus problem, the amounts in play are manageable within the euro zone. Europe markets are also being sustained by positive economic sentiment worldwide. "Globally, the U.S. is doing well, Europe isn't falling apart, and China's OK. At the same time, the [U.S. Federal Reserve] is continuing to pump cheap money into the economy," says Adams.

Even so, he cautions, investor sentiment could easily shift: "Russia might be interested in Cypriot gas, but that sort of deal could take a while to put together. Cyprus doesn't have that much time. Once you've made the decision to close your banks, you have only days to get them open again before the country starts to suffer severe economic damage."

THE EURO STOXX 50 INDEX lost 0.9% last week, while the larger Stoxx Europe 600 slid 1.1% The euro was unchanged against the dollar at about $1.30.